Long-Run Outcomes in Perfect Competition

1. The Industry Supply Curvea. This is the relationship between the price

and the total output of an industry as a whole

i. This is the supply curve or market supply curve.

b. Short-run Industry Supply Curve▫Remember in the short-run the number of

firms is fixed▫Also the industry supply curve is the

horizontal sum of the individual supply curve of all firms

i. Short-run industry supply curve1. Shows how the quantity supplied by an

industry depends on the market price; give a fixed number of firms

ii. Short-run market equilibrium1. When the quantity supplied equals the

quantity demanded, taking the number of producers as a given

c. Long-run Industry Supply Curve▫Whenever market price is above the

minimum average total cost of production new firms will enter the industry.

•What happens when new firms enter the industry?1. Quantity supplied will increase2. Short-run supply curve will shift to the

right This will alter market equilibrium and lower

market price3. Market firms will lower output in response

to new market price, but the total industry out put will increase because of the larger number of firms in the industry

i. Long-run market equilibrium1. Is when the quantity supplied equals the

quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur

ii. Long-run industry supply curve1. Shows how the quantity supplied

responds to the price once producers have had time to enter or exit the industry

2. Cost of Production and Efficiency in Long-Run Equilibrium

a. 3 Conclusions about cost of production and efficiency in the long-run equilibrium of a perfectly competitive industry

i. In a perfectly competitive industry in equilibrium, the value of marginal cost is the same for all firms.

ii. In a perfectly competitive industry with free entry and exit, each firm will have zero economic profit in the long-run equilibrium

iii. Long-run market equilibrium of a perfectly competitive industry is efficient: no mutually beneficial transactions go unexploited.